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Monday, October 30, 2006

Amboy, Dwek and Kara

This pot is on the boil. Both Kara Homebuilders and Dwek had large loans, including large loans to Amboy National Bank. Dwek is up on bank fraud charges, and Kara has filed for bankruptcy. This article winds through some of the specifics.

What blew my mind was this:
Dwek's empire meltdown started in May, after he was accused of bouncing a $25.2 million check and withdrawing $21 million that did not belong to him. A Superior Court judge soon froze all of Dwek's assets. When Dwek's loans seemed to be on the verge of default, a trust that involved the sister of Amboy president George E. Scharpf purchased $18 million of the Amboy loans at full value, Amboy officials said. Scharpf could not be reached for comment.

Together, Dwek and Kara loans remaining with Amboy total nearly $108 million.

One $10 million Amboy loan to Dwek drew attention to itself because mortgages on two of three properties securing the loan were not filed in county clerks offices for seven months. The third property was sold months later before the mortgage could be filed.
!!!! Depending on the collateral type, there are different methods of perfecting your security interest, but all of them depend on timeliness of filing. If you think about it, this is the only fair way to do it, because if you don't file notice of your security interest, others may advance funds without realizing the true state of affairs. This raises a ton of questions. Were the bank's internal systems in disarray? Or was someone within the bank helping Dwek to spin it out? Most such account relationships are managed by one or two people, but bank management has the duty to effectively supervise the relationship. And what's with the back-scratchy loan purchase? I sure hope someone's looking at the UCCs too; for construction loans, getting the UCCs right is imperative.

The OCC ought to be all over this bank.

Asbury Park Press has more detail on the Dwek dreck:
Amboy lent Dwek the $10 million in October, according to land and court records. That loan was secured by mortgages placed against three properties: a commercial site in Neptune City, a property in Long Branch and a 4-acre defunct marina in Dover Township, Ocean County.

Amboy already had a mortgage for an earlier $850,000 loan on the Neptune City property. But two other banks were able to get two mortgages totaling $4.1 million placed ahead of Amboy on the Neptune City and Dover Township properties because of Amboy's delay in filing its own $10 million mortgages.
That would make a total of nearly $15 million in mortgages on two properties that Dwek had purchased for $5.35 million....

Also on May 5, the bank sold the $10 million loan to a company, D and D I Inc., whose president is George E. Scharpf, 65, of Colts Neck, the president of Amboy bank. Court records filed by Amboy Bank say D and D paid $9,995,138 for the loan.

It was then sold again on May 31 to D and D Trust, which has Scharpf's sister, Marguerite DiSepio, as a trustee. DiSepio, 68, is also an officer in the Amboy Foundation, the bank's charitable arm, according to state filings.

In addition, Amboy gave Dwek a $12 million loan in February. The mortgage securing that loan on four Ocean Township residential lots wasn't filed with the county until May.
The three mortgages securing the $10 million loan indicate that they were given for $1 and "other good and valuable consideration." Other land records reflect it was a $10 million loan.

In court papers, fiscal agent Donald M. Lomurro, who has been given the job of recommending how to pay off Dwek's creditors, said a judge would have to decide whether the mortgages secure $1 or the full amount.
Whoa!!!! As a wild guess, the $1 mortgage means that Dwek might have some legal cover for not reporting a $10 million dollar encumbrance when he went to get further loans securing this property. According to the first article, Amboy's entire loan loss reserves amount to $58.6 million, while it is into Dwek and Amboy for about $108 million, which doesn't include the $10 million loan shuffle detailed by Asbury Park Press.

According to this article, Amboy has about $1 billion in construction loans, $47.1 million in non-performing loans as of June 30th, and $257.6 million in capital. A $58.6 million loan loss reserve may not be sufficient under the circumstances.

While the stuff about recordation failures and the loan shuffle is extremely unusual in the banking industry, see Northern New Jersey Real Estate Bubble for details on Dwek's personal mortgages on his home (Asbury Park Press):
"Although the house was assessed in 2005 at $1.2 million, public records show the mortgages on Dwek's Crosby Avenue house total $2.4 million. That includes $850,000 in two mortgages issued by Community Bank of New Jersey in 2001 and 2004. The bank was bought by Sun National Bank."

"Washington Mutual Bank issued a third mortgage on the house for $1.5 million this January to Pearl Dwek, Solomon Dwek's wife."
I don't think the markets have adequately recognized the RE problem at all.

Send in the feds- this is racketeering all the way around.

I thought banks and mortgage companies had compliance depts.

Why aren't they a part of the story?
A good question, but no one's going to talk.

This is, AFAIK, extremely unusual. It's so unusual as to be unbelievable, really, except it apparently did happen.
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